Goodwill in partnership reconstitution can be a deemed gift when existing partners transfer rights for inadequate consideration.

Goodwill is treated as property for gift-tax purposes, and reconstitution of a partnership with admission of new partners may trigger a deemed gift where existing partners reduce or relinquish their interest in goodwill. Mere contribution of capital by incoming partners or their participation in the business does not, by itself, establish adequate consideration. The adequacy of consideration must be measured against the value of the goodwill rights transferred, and a reduced profit share coupled with induction of new partners may amount to a taxable transfer if the benefit conferred exceeds the consideration received. On the stated facts, the relinquishment was not supported by adequate consideration and was treated as a deemed gift.

---

---

Issues: Whether the reconstitution of the partnership and admission of new partners resulted in a deemed gift of the existing partners' share in the goodwill, and whether the consideration received for such relinquishment was adequate to avoid gift-tax liability.

Analysis: Goodwill is property for the purposes of gift-tax. Where existing partners reduce or relinquish their interest in goodwill in favour of newly inducted partners, the transaction is taxable if the consideration is not adequate. Mere contribution of capital by new partners or their participation in the business does not, by itself, establish sufficient consideration. The adequacy of consideration must be judged against the value of the goodwill rights transferred, and a reduced share in profits coupled with induction of new partners may constitute a transfer of goodwill attracting gift-tax when the benefit conferred exceeds the consideration received.

Conclusion: The relinquishment of the share in goodwill was not supported by adequate consideration and amounted to a deemed gift; the question was answered in favour of the Revenue and against the assessee.

Ratio Decidendi: A reduction or relinquishment of a partner's share in goodwill in favour of new partners constitutes a deemed gift under the Gift-tax Act unless the consideration for the transfer is adequate and commensurate with the value of the goodwill transferred.

---